Washington Report on Middle East Affairs, July/August 1998, Pages 15, 62

Special Report

New U.S. Foreign Aid Agreement May Provide Israel a Net Increase in U.S. Foreign Aid

By Shawn L. Twing

U.S. State Department, Pentagon and Israeli officials reached a tentative agreement in May to phase out U.S. economic aid to Israel gradually over 10 years, while simultaneously increasing U.S. military aid. Under the agreement worked out by negotiating teams led by Israel’s Finance Minister Ya’acov Neeman and U.S. Undersecretary of State for Economic and Business affairs Stuart Eizenstat, starting in fiscal year 1999 (which begins Oct. 1, 1998) the United States will reduce its annual $1.2 billion in economic aid to Israel by $120 million each year until the program ends in 2007.

During that same period, the United States will increase its annual $1.8 billion in grant military aid to Israel by $60 million annually until it reaches an annual total of $2.4 billion in fiscal year 2008.

A significant sticking point in the negotiations was how much of its military aid grant Israel will be allowed to spend in-country on purchases of Israeli-made defense items. Unlike any other country receiving U.S. military aid—the intent of which normally is to subsidize American defense companies and create jobs in the United States—Israel presently is allowed to spend $475 million of its annual $1.8 billion in U.S. military aid on Israeli-made defense items.

Israeli officials initially hoped to spend all of the additional military aid from the United States in Israel, a suggestion that was flatly refused by U.S. officials, including Assistant Secretary of State for Near East Affairs Martin Indyk. Indyk, former U.S. ambassador to Israel, described the Israeli demands as a “very problematic issue,” according to the Jerusalem Post.

“U.S. defense contractors want the business and that’s understandable,” Indyk said. “The Congress and administration want the business to go to American companies, so that’s one [issue] that people should understand is very difficult for us.”

Finance Minister Neeman later said that Israel would settle for spending 40 percent of the additional aid in Israel—in addition to the $475 million—a suggestion that also was refused.

The eventual settlement, according to the U.S. trade weekly Defense News, was that Israel will be allowed to spend 25 percent of the additional aid on Israeli-produced or co-produced defense items. That will result in an additional $15 million windfall each year for Israeli defense companies until the total amount of U.S. aid Israel is allowed to spend annually on Israeli-produced or co-produced military hardware reaches $625 million in 2008.

In the past and at present, this annual infusion of U.S. aid directly into Israel’s numerous defense industries has helped them compete for and win lucrative international and American defense contracts, often at the expense of American defense companies. Israeli companies currently are competing against U.S. firms for more than a dozen large contracts worth billions of dollars and thousands of jobs.

One example of this competition is for an estimated $5 billion contract from Turkey for 1,000 main battle tanks. Competing against the M1 Abrams tanks made by General Dynamics Land Systems is Israel’s Merkava main battle tank. In fiscal year 1977 Israel asked for and received a “one-time only” provision to spend $107 million in U.S. military aid in Israel to build the Merkava. Since 1977, Congress has allowed Israel to spend more than $5 billion in U.S. military aid in Israel on weapons systems like the Merkava, a massive subsidy which routinely creates competition for American-made military hardware.

One important question that remains conspicuously unanswered is how Israel will repay its outstanding financial debts to the United States government. Attached to every foreign aid bill since 1984 has been the Cranston Amendment, named after its Senate sponsor, California Democrat Alan Cranston, that compels the U.S. government to give Israel enough economic aid to pay the interest and principal due each year on its debts to the U.S. government until those debts are paid in full. Currently, approximately $1 billion of Israel’s annual $1.2 billion in economic support grants is returned to the U.S. government to repay Israel’s outstanding loans, which presently total approximately $3 billion.

It is possible that Israel will ask for the aid to be forgiven outright. Officially, the United States has never forgiven a loan to Israel, but the “U.S. government has waived repayment of aid to Israel that originally was categorized as loans,” according to an annual report on U.S. aid to Israel prepared by the Congressional Research Service, the investigative arm of the U.S. Congress. Therefore, very likely the Israeli government will ask the United States to “waive repayment” of outstanding loans rather than “forgive” them, since the latter term carries a distinctly negative connotation in economic circles. Whether the process is called “waiving repayment” or “forgiving a loan,” the results are identical, however. What originally was sold to the U.S. public as a “loan” to Israel ends up being a U.S. taxpayer grant, or gift, to Israel.

It also is possible, although highly unlikely, that Israel has decided to repay its outstanding debts to the United States. Under the current agreement, Israel will receive $5.4 billion in economic aid through fiscal year 2007, probably more than enough to “repay” the approximately $3 billion Israel currently owes the U.S. government. In fact, despite Israel’s substantial per capita gross national product—which exceeded $17,000 in 1997, putting it above Spain’s and approaching England’s—it is doubtful that Israel will voluntarily reduce its reliance on American aid. The simple fact is that Israel lacks any incentive to do so.

Israeli Prime Minister Binyamin Netanyahu received a standing ovation on the floor of Congress in 1996 when he vowed to reduce Israeli dependence on U.S. aid. But he has made no move to actually do so other than the agreement described above, which commits the United States to at least $26.7 billion in economic and military grants to Israel over the next 10 years.

Nor has any member of Congress dared to ask when Netanyahu will begin fulfilling his pledge to Congress. However, until the United States makes clear its willingness to reduce aid to Israel unilaterally, or even punitively if Israel continues to defy the United States on the Israeli-Palestinian peace process, Israeli officials and their American lobbyists cannot be expected to reduce Israel’s massive aid program on their own.

It also is noteworthy that the current U.S.-Israeli agreement is a clear violation of the spirit, if not the letter, of U.S. law, which does not allow the United States to commit to foreign aid beyond the next fiscal year. The United States already violates the spirit of this law when it allows Israel (and, to a lesser extent, Egypt and Turkey) to use cash-flow financing to purchase American defense goods.

Cash-flow financing allows Israel to pay for U.S. military hardware with multi-year contracts, rather than paying for each contract up front. Critics argue that this preempts congressional discretion in deciding the level of U.S. annual aid to Israel, since it compels the U.S. government to continue providing military aid to pay off previously agreed-to contracts. Israel, for example, currently has spent almost all of the annual military aid it expects to receive from the United States through fiscal year 2005. Should the United States choose to reduce or phase out Israel’s military aid for political or economic reasons in the future, it would create major problems for (or with) dozens of U.S. defense contractors who have been promised billions of dollars in Israeli defense purchases through at least the first half of the next decade.

Beyond cash-flow financing, the U.S. government’s multi-year commitment to Israel also evades the requirement for annual executive and legislative branch evaluations of foreign aid programs to determine their benefits to the United States and to the recipient countries. The current U.S.-Israel agreement, however, guarantees Israel a total of $26.7 billion in foreign aid over the next 10 years, a stunning amount that may represent a net increase, not a decrease, in the transfer of U.S. taxpayer funds for Israel if the United States government “waives repayment” of Israel’s outstanding debt.

Nor does this total include all of Israel’s special perks, of which there are many, which add another approximately $250 million annually—$2.5 billion over 10 years—to Israel’s grant aid from the United States. Nor does the agreement stipulate that the program will end in 2008.

The bottom line is that the so-called reduction in U.S. aid to Israel reserves for Israel more than $29 billion during the next 10 years, while simultaneously protecting Israel from the possibility that the Clinton administration or any successor administration might be able to use a reduction in aid as leverage as Israel continues to ignore or violate the agreements it signed with the Palestinians in September 1993 and September 1995 on the White House lawn.